Labour/Labor :: Rate of Pay Variance

The Formulae » Labor/Labour Rate of Pay Variance (LRPV)

The variance in the total cost of labour/labor on account of a variation between the standard rate (rate at which the labourers/laborers should have been paid) and the actual rate (rate at which they have been paid). It is calculated as the difference between the standard cost of actual labour/labor time and the actual cost of labour/labor. ⇒ Labour/Labor Rate of Pay Variance = Standard Cost of Actual Labour/Labor Time − Actual Cost of Labour/Labor = (Actual Time × Standard Rate) − (Actual Time × Actual Rate) ⇒ LRPV = (AT × SR) − (AT × AR) = AT × (SR − AR) Memorise this general formula for easier recollection (ignoring the specific formulae below) For each Labour/Labor Type Separately ⇒ LRPVLab = (ATLab × SRLab) − (ATLab × ARLab) = ATLab × (SRLab − ARLab) For all Labour/Labor Types together [Total Labour/Labor Rate of Pay Price Variance :: TLRPV] When two or more types of labour/labor are used for the manufacture of a product, the total Labour/Labor Rate of Pay variance is the sum of the variances measured for each labour/labor type separately. ⇒ TLRPV = LRPVSk + LRPVSe + ..... No Direct Formula There is no direct formula for calculating the total labour/labor rate of pay variance. TLRPV ≠ ATMix (SRMix − ATMix)

LRPV Formula interpretation

The above formulae for Labour/Labor Rate of Pay Variance can be used in all cases i.e. when AO = SO, AO ≠ SO, STMix = ATMix and STMix ≠ ATMix. Standard Rate present in the formula is unaffected by standard recalculation. Standard Time which changes on recalculating standards is not found in the formula. Actual Time ⇒ Gross Time Wherever you find the presence of time in the formula, you should interpret it as Actual (Gross) Time. Where there abnormal loss of time, the actual time is segregated into two as abnormal loss time and net time. Even in such cases, for the purpose of calculating the Cost Variance, the total (Gross) time should be considered for actual time. LRPV = 0 Labouir/Labor Rate of Pay Variance for each labour/labor type be zero if the rate at which the labourers/laborers are paid i.e. actual rate (AR) is the same as its standard wage rate (SR). TLRPV = 0 When more than one type of labour/labor is used, the Total Labour/Labor Rate of Pay Variance may become zero When the LRPV on account of each labour/labor type is zero, or When the unfavourable variance due to one or more labour/labor types is set off by the favourable variance due to one or more other labour/labor types. Therefore, it would not be appropriate to conclude that all the labour/labor time is paid at the standard rates just because the total LRPV is zero. Where the total LRPV is zero, you have to verify individual variances before concluding that all the individual variances (LRPV's) are zero.

Recalculating Standards does not effect LRPV Calculations

Recalculating Standards does not affect the data used for calculating Labour/Labor Rate of Pay Variance. The formula for calculating Labour/Labor Rate of Pay Variance involves AT, SR and AR. It does not involve and thus is not influenced by ST. These data would not change on standards being recalculated either based on the output or input. SO ≠ AO and STMix ≠ ATMix Standard [Production: 7,500 units] Actual [Production: 7,125 units] Time (hrs) Rate (Rs/hr) Cost (Rs) Rate (Rs/hr) Total Normal Abnromal Time (hrs) Cost (Rs) Time (hrs) Cost (Rs) Time (hrs) Cost (Rs) Skilled 200 20 4,000 22 240 5,280 216 4,752 24 528 Semi Skilled 400 15 6,000 14 500 7,000 450 6,300 50 700 Un Skilled 150 10 1,500 12 220 2,640 198 2,376 22 264 Total 750   11,500   960 14,920 864 13,428 96 1,492 Standards Recalculated for the Actual Output Standard [Production: 7,125 units] Actual [Production: 7,125 units] Time (hrs) Rate (Rs/hr) Cost (Rs) Rate (Rs/hr) Total Normal Abnromal Time (hrs) Cost (Rs) Time (hrs) Cost (Rs) Time (hrs) Cost (Rs) Skilled 190 20 3,800 22 240 5,280 216 4,752 24 528 Semi Skilled 380 15 5,700 14 500 7,000 450 6,300 50 700 Un Skilled 142.5 10 1,425 12 220 2,640 198 2,376 22 264 Total 712.5   10,925   960 14,920 864 13,428 96 1,492 Standards Recalculated for Actual Input Standard [Production: 8,640 units] Actual [Production: 7,125 units] Time (hrs) Rate (Rs/hr) Cost (Rs) Rate (Rs/hr) Total Normal Abnromal Time (hrs) Cost (Rs) Time (hrs) Cost (Rs) Time (hrs) Cost (Rs) Skilled 230.4 20 4,608 22 240 5,280 216 4,752 24 528 Semi Skilled 460.8 15 6,912 14 500 7,000 450 6,300 50 700 Un Skilled 172.80 10 1,728 12 220 2,640 198 2,376 22 264 Total 864   13,248   960 14,920 864 13,428 96 1,492

Solution [in all cases]

The data that is used for calculating Labour/Labor Rate of Pay Variances can be picked up from the working table built with the data given (as it is) or with the data involving recalculated standards based on either the Actual Output or the Actual Input. LRPV = (ATG × SR) − (ATG × AR) ⇒ LRPV = ATG (SR − AR) Using LRPVLab = AT(G)Lab (SRLab − ARLab) Labour/Labor Rate of Pay Variance due to Workers who are • Skilled = 240 hrs (Rs. 20/hr − Rs. 22/hr) = 240 hrs (− Rs. 2/hr) = − Rs. 480 ⇒ LRPVSk = − Rs. 480 [Adv] • Semi-Skilled = 500 hrs (Rs. 15/hr − Rs. 14/hr) = 500 hrs (Rs. 1/hr) = + Rs. 500 ⇒ LRPVSe = + Rs. 500 [Fav] • Unskilled = 220 hrs (Rs. 10/hr − Rs. 12/hr) = 220 hrs (− Rs. 2/hr) = − Rs. 440 ⇒ LRPVUn = − Rs. 440 [Adv] Total Labour/Labor Rate of Pay Variance = − Rs. 420 [Adv]

Formulae using Inter-relationships among Variances

LCV = LUV/LEVN + LRPV + LITV   → (1) ⇒ LRPV = LCV − LUV/LEV(N) − LITV For each Labour/Labour Type Separately ⇒ LRPVLab = LCV − LUV/LEV(G)Lab − LITVLab For All Labour/Labor Types Together ⇒ LRPVMix = LCVMix − LUV/LEV(G)Mix − LITVMix   LUV/LEV(N) = LMV/GCV + LYV/LSEV   → (2) LCV = LRPV + LITV + LMV/GCV + LYV/LSEV   → (3)   [From (1) and (2)] ⇒ LRPV = LCV − LITV − LMV/GCV − LYV/LSEV For each Labour/Labor Type Separately ⇒ LRPVLab = LCVLab − LITVLab − LMV/GCVLab − LYV/LSEVLab For All Labour/Labor Types Together ⇒ LRPVMix = LCVMix − LITVMix − LMV/GCVMix − LYV/LSEVMix

Who is held responsible for the Variance?

Since this variance is on account of the wage rate paid being more or less than the standard, the people or department responsible for deciding the wage rates actually to be paid can be held responsible for this variance.

Author Credit : The Edifier

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